*** The Health Care Programs Manual (HCPM) has been replaced by the Minnesota Health Care Programs Eligibility Policy Manual (EPM) as of June 1, 2016. Please refer to the EPM for current health care program policy information. ***
Effective: June 1, 2011 |
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20.25.20.25 - Rental Income |
Archived: June 1, 2016 (Previous Versions) |
Rental property is property the client owns and rents to others. This may include separate living quarters in the same building, such as a duplex. Rental income comes from payments that an individual receives from another person for the use of real or personal property such as land, housing, or machinery. Income from rental property may be earned income or unearned income.
The following policy regarding rental income is for MA Method A, MA Method B, Medicare Savings Programs and MA-EPD.
See Roomer /Boarder Income for treatment of income received from roomers and boarders.
MA Method B, Medicare Savings Programs and MA-EPD.
Calculate rental income as follows:
l Count income from rental property as:
n Earned income when the client spends an average of at least 20 hours per week maintaining or managing the property.
n Unearned income when the client spends less than 20 hours per week maintaining or managing the property.
l Allow the following expenses as deductions for rental property from gross receipts:
n Real estate tax.
n Insurance.
n Utilities.
n Interest and escrow portions of a mortgage payment (at the point the payment is made to the mortgage holder).
n Upkeep and repairs.
l Allow a deduction for upkeep and repairs to existing structures or equipment.
n Only consider minor corrections to an existing structure as a repair.
n Do not allow expenses for adding to or replacing existing structures or equipment to increase the value of the property.
n Use the greater of the following for this deduction:
m Up to $103 per year.
m 2% of the Estimated Market Value (EMV) found on the county tax assessment form.
l If less than 100% of the property is rented, determine whether the deductions must be prorated based on the percentage of the property that is rented.
n There are two ways to obtain the percentage of the property that is rented:
1) Divide the number of rooms that the client rents out by the total number of rooms in the entire building.
2) Divide the square footage that the client rents out by the total square footage in the entire building to obtain a percentage of the property that is rented.
n Multiply the allowable deductions by the percentage of the property that is rented.
MA Method B, Medicare Savings Programs and MA-EPD
Calculate rental income as follows:
l Count income from rental property as:
n Earned income for each month the client spends an average of at least 10 hours per week maintaining or managing the property.
n Unearned income for each month the client spends less than 10 hours per week maintaining or managing the property.
l Determine gross rent received and deductible expenses month by month.
Note: Rental deposits are not income to the landlord while subject to return to the tenant. Rental deposits used to pay rental expenses or repairs become income to the landlord at the point of use.
l Subtract deductible expenses paid in a month from gross rent received in the same month.
Note: If the allowable expenses paid in a month exceed the gross rental income in the same month, subtract the excess expenses from the next month's gross rental income.
n Continue to do this as necessary until the end of the tax year in which the expense is paid.
n If there are still excess expenses after applying the expenses to the future month’s rental income, subtract the remaining excess expenses from the gross rental income received in the month prior to the month the expenses were paid.
n Continue to do this as necessary to the beginning of the tax year involved.
l Examples of deductible expenses include:
n Property taxes.
n Real estate insurance.
n Utilities.
n Interest and escrow portions of a mortgage payment (at the point the payment is made to the mortgage holder).
n Advertising for tenants.
n Lawn maintenance.
n Snow removal costs.
n Property management fees paid to a third party.
n Upkeep and repairs to existing structures or equipment.
Note: There is no limit to the amount of this deduction.
m Only consider minor corrections to an existing structure as a repair.
m Do not allow expenses for adding to or replacing existing structures or equipment to increase the value of the property.
m If it is uncertain whether an expense is for repair or replacement, follow your agency's procedures to submit a policy question to HealthQuest.
l Examples of nondeductible expenses include:
n Principal portion of a mortgage payment;
n Capital expenditures (i.e. an expense that increases the value of property which is subject to depreciation for income tax purposes.)
n Depreciation or depletion of property.
l Calculation of Expenses in a Multiple Family Residence.
n If the units in the building are of approximately equal size, prorate allowable expenses based on the number of units designated for rent compared to the total number of units.
n If the units are not of approximately equal size, prorate allowable expenses based on the number of rooms in the rental units compared to the total number of rooms in the building. (The rooms do not have to be occupied).
n Any expenses strictly related to a particular rental unit are deducted in total from the rent for that unit. Such expenses are not prorated.
Note: See Roomer /Boarder Income if the client rents out a room in their residence.
l Calculation of Expenses for Land Rental.
Prorate expenses based on the percentage of total acres that is for rent.
Example:
Tim owns rental property that has damage to the roof.
Action:
Allow the expense to repair only the damaged area of the roof as a deduction from the rental income Tim receives for that month.
If Tim decides to replace the entire roof do not allow this expense as a deduction from the rental income.
Example:
Jill resides in an LTCF and has a life estate interest in a home. She is receiving rental income monthly. Jill's authorized representative determines that the house is very drafty and expensive to heat in the winter due to the home’s very old windows. The authorized representative has all of the windows in the house replaced and requests that this expense be deducted from Jill’s rental income.
Action:
This is a capital expenditure and cannot be allowed as a deduction from Jill's rental income.
Example:
Alfred is living in an LTCF. He owns a life estate that is currently being rented for $600 a month. Half of his property tax of $900 is due in May. Alfred pays the $900 in May.
Action:
Deduct $600 of the property tax payment from the rental income received in May. There is a balance of $300 that can be deducted from the rental income received in June.
Example:
Eugene owns a farm consisting of 67 acres and a farm house. He lives in a nursing home and rents out 46 tillable acres to a local farmer. He does not rent out his home. His grandson lives in the farm house for free. $2,070 farm rental income is received twice per year on only the 46 tillable acres.
Action:
Allow property taxes and insurance paid as deductions prorated based on the percentage of total property that is rented out.
Since the farm house is not income producing, do not allow upkeep and repairs or any other expenses associated exclusively with the house as deductions.